As announced in the Summer Budget , buy to let landlords have been dealt a blow as finance cost relief on buy-to-let properties is to be eliminated. It will be reduced by 25% from 6 April 2017 and then reduced every year by 25%, until it is totally removed by 6 April 2020. It will be gradually replaced by a tax reducer, which will be set at a maximum of 20% of the financing costs by 2020/21.
Who will be affected?
The government announced that it expects 20% of landlords to be affected by the changes. This does not, however, reflect the potentially striking scale of the changes as each landlord may have a number of properties.
Basic rate taxpayers will be the least affected as they will still receive a basic rate reduction. However, as fewer expenses are claimed, the actual rental profits could be greater than previous years. This could push some basic rate taxpayers into the higher rate tax band and higher rate taxpayers into the additional rate band.
Additionally, if the interest element previously led to a small net loss which has been accruing over the years, landlords may now find themselves reporting profits, which may mean the accrued losses are eaten up, even though a cash loss is being made.
Tax will be payable on a paper profit as opposed to a cash one. This will result in some landlords having tax rates exceeding 100%. If the landlord has little or no other expenses, this will effectively be a tax on their turnover.
The worst case scenario is that some landlords may start making a loss and therefore they would be forced to either increase their rents or not to sell their property. Of course, some landlords may choose to increase rents to recoup the extra tax anyway. Perhaps the government believes tenants will choose to buy rather than face rent increases.
Note. Wealthy landlords who can afford to buy their properties in cash will not be affected.
For more advice contact Emjay Associates on 01903 367073 to arrange a review of your rental income portfolio and how this can be optimised to reduce your tax burden